Slow but steady: How the iPhone is changing the phone industry

Every time Apple enters—or seems to even think about entering—another market, we’re barraged with noise about how the company should, or must, or can’t reinvent this industry. Why all the attention? Because Apple has a remarkable track record of having reinvented industries before, and the reward for a job well done is—surprise—another job.

Steve Jobs’s proclamation that Apple was going to reinvent the phone was also a message to the carriers, that their days of influence were numbered.

Because it’s not just that people expect these markets to change—it’s that they expect those changes overnight. But these shifts don’t usually happen immediately or catastrophically; more often than not, it’s a gradual, tectonic erosion of the established norms.

At the launch of the iPhone, then CEO Steve Jobs did not hesitate to proclaim, in his usual hyperbolic fashion, that the handset would reinvent the phone.

At Macworld 2007, Steve Jobs announced the iPhone as a "revolutionary" mobile phone.

But Jobs prefaced the introduction of the iPhone by discussing two of Apple’s previous revolutionary products:

In 1984, we introduced the Macintosh. It didn't just change Apple, it changed the whole computer industry.

In 2001, we introduced the first iPod. And, it didn't just change how we all listen to music. It changed the entire music industry.

Moving directly from those to announcing the iPhone, Jobs’s implication was clear: This product wasn’t just about changing the phone as a device.

In the months leading up to the announcement—and in the years afterward—there have been more than a few rumors that Apple might extend its different-thinking ways to the cell phone industry itself; say, by becoming its own carrier, perhaps by selling rebranded service as a mobile virtual network operator (MVNO).

To date, Apple hasn’t taken these steps—nor do I think it intends to. But its influence has still unquestionably been felt in the wireless industry at large. And while you might not be able to draw a single, direct line of causation, it seems clear that the rise of the iPhone and other smartphones are nudging the industry onto a new path, whether the industry likes it or not.

The beginning of the end of subsidies

The original iPhone, sold without subsidies, proved to be too rich for consumers’ blood.

In 2007, Apple struck an exclusive deal with AT&T (then Cingular) to distribute the iPhone, a situation which lasted until early 2011. As part of that initial deal, AT&T would not subsidize sales of the handset—instead, Apple got a portion of the carrier’s subscriber revenue.

That was in itself unprecedented, but it didn’t end up benefiting Apple as much as the company might have hoped. At a time when people could pick up less capable phones for free or cheap—as long as they signed up for a two-year contract—the subsidy-free $500 price tag was too costly for many mainstream consumers. Apple ended up cutting the price, and since the subsequent introduction of the iPhone 3G in 2008, Apple has operated on the same subsidized model as everybody else.

But in the last six years, the smartphone market has become more and more established; unlike in 2007, when the iPhone was an unknown quantity, people are now familiar enough with these devices that they’re willing to invest more money upfront, instead of paying it out over the course of a 24-month term.

iPad data plans are far cheaper than their smartphone alternatives—and you don't need a contract.

Take the iPad, for example. At $459, even the 16GB version of the cellular-enabled iPad mini costs a pretty penny. But it brings with it the option to sign up for a monthly cellular data plan without any long-term commitment, allowing you to cancel at any time. (Of course, you can’t really switch your iPad to a different cellular network, but more on that in a bit.) The cheapest of those plans is just $15 per month—far less than what you’d pay for a monthly cell phone plan.

That’s not the only indication of change, either. Late last year, T-Mobile announced its plan to drop both subsidies and contracts. Though that will result in higher upfront costs for handsets, it also stands to lower monthly service costs, since the company won’t have to recoup the handset subsidy over the lifetime of a customer’s two-year contract. Given T-Mobile’s spot as the smallest of the major U.S. carriers, it’s no surprise that it’s the first to forego this time-honored practice—of its competitors, it has the least to lose and the most to potentially gain.

Of course, there’s no guarantee that this trend will sweep across the board: It’s a much riskier proposition for the likes of Verizon, AT&T, and Sprint. But this does open up a hole in the traditionally locked-in cell phone field. Now, if T-Mobile doesn’t have you under contract, you can leave without having to pay an early termination fee—if, of course, you have an unlocked phone that can switch networks. Which brings us to another point …

Unlock and load

Though software exists to unlock your smartphone, doing so is technically illegal at present.

It’s not only legal documents like contracts that keep us tethered to a particular carrier. Technology is likewise used to make sure that we customers don’t stray from our one true carrier. In the past, the use of different network protocols and radio frequencies made it impractical to jump from carrier to carrier. These days, the increasing prominence of world phones and convergence on standards like LTE have reduced some of the friction of changing carriers, but in the U.S. most phones remain, by and large, still locked to individual carriers.

Even worse, though it’s not hard to find a way to unlock phones, the process of circumventing that restriction is currently illegal for any phones purchased since the beginning of the year. Which is a bit like selling a TV that only works with a single cable provider.

There are already signs, though, that a shift is underway. Some handset makers are selling unlocked phones, though the lack of carrier subsidies means that the prices are much higher. For example, an unlocked 16GB iPhone 5—which only works on certain networks in the U.S.—costs $649, making the subsidized $199 figure seem like pocket change; even the original, unsubsidized iPhone was less expensive.

At those prices, the device itself becomes a significant investment. And it’s an investment that many consumers will want to hold onto, even if they decide they want to switch carriers. Like the iPad mini, they don’t want to be bound into an expensive contract when they’re already paying so much upfront for a device.

A contract-free, unlocked iPhone represents a serious investment for most consumers.

And even though the Library of Congress did not renew the DMCA exemption allowing customers to unlock phones, the White House this week responded positively to a public petition, calling the ability to unlock phones “common sense, crucial for protecting consumer choice, important for ensuring we continue to have the vibrant, competitive wireless market that delivers innovative products and solid service to meet consumers’ needs.”

Dan Moren Senior Editor

Dan has been writing about all things Apple since 2006, when he first started contributing to the MacUser blog. Since then he's covered most of the company's major product releases and reviewed every major revision of iOS. In his "copious" free time, he's usually grinding away on a novel or two.More by Dan Moren